The outlook for European commercial real estate lending remains positive for the next 12 months according to the results of a Cushman & Wakefield survey which revealed more than 90 per cent of respondents will maintain or expand their 2015 activity
The European Lending Trends report details the survey responses of more than 60 active European lenders who provided over EUR80 billion of loans in 2015. The survey shows that overall the environment for refinancing remains stable and although the pace of growth for orginations of loans is positive, it is set to be lower in the first half of 2016 compared to the same period 12 months earlier.
The UK, France and Germany remain the key markets from a lending perspective with those countries expected to represent 50 per cent of anticipated activity in 2016. There is greater activity expected in the likes of Spain – indicating an increased appetite for risk there - as well as the Nordic countries. This is in contrast to Italy where a desire to lend remains weak.
The majority of lenders (57 per cent) remain engaged in senior lending, which is consistent with previous surveys conducted by Cushman & Wakefield. However, in contrast with the past, there is a higher proportion (20 per cent) of lenders engaged in whole loans. This style is now a clear second preference for lenders, ahead of mezzanine finance and stretch senior. Many lenders will offer a whole loan and then syndicate either the senior or mezzanine position later.
The survey also shows that all property Loan-to-Value ratios (LTVs) are on average in the 55 per cent to 66 per cent bracket across Europe with the highest in Frankfurt and Paris (both 64 per cent) followed by London (63 per cent). Debt funds are willing to lend at higher LTVs compared to commercial banks and institutions and overall relatively few lenders are looking to expand into speculative development.
The report shows a broader range in average loan margins across Europe from around 130bps in Stockholm and 140bps in Frankfurt and Paris, up to over 250bps in Lisbon (see below table). Milan is the only other city covered where margins are over 200bps. Looking forward lenders expect margins to remain under downward pressure, the exceptions being Sweden and the UK. Indeed Cushman & Wakefield’s own observations of the UK market showed margins rose by 25bps in Q4 2015, notably in London. Commercial banks are typically offering the lowest margins ahead of institutions and debt funds.
Average LTV, margin and size of loan respondents are currently willing to lend in each market based on prime commercial real estate.
Edward Daubeney (pictured), Cushman & Wakefield’s Head of Debt Advisory EMEA, says: “Our report shows that lenders remain positive for 2016 overall, with more than 90 per cent expecting lending activity to increase or remain static compared with 2015 levels, with the balance evenly split.
“The outlook for overall loan books is one of expansion, with fewer lenders expecting a decline in the next six months. This implies that the workout of loans and write downs is nearing an end. The outlook remains broadly stable and this is a step change in attitude compared with previous surveys we have conducted.”
Report author Nigel Almond, Cushman & Wakefield’s Head of Capital Markets Research, says: “Lenders now see a broader range of risks on the horizon. In our previous survey, a majority (58 per cent) of respondents saw weight of capital as the main threat to the lending market. Whilst weight of capital remains the biggest threat today, at 39 per cent it is much reduced. The threat of a British exit from Europe is seen as the second biggest threat at 16 per cent. A Chinese slowdown at 15 per cent is the next biggest threat, compared to just a 4 per cent weight in our previous survey. Despite these headwinds commercial real estate investment markets still offer good investment opportunities and demand remains which will support the positive sentiment in this survey.”